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Sunday, December 4, 2016

Why a Protectionist Shock Would Do More to Harm Than to Help the Job Market

Dramatic promises to restrict international trade were a signature
element of Donald Trump’s presidential campaign. So far, he seems to be
following through, with an early reaffirmation of his intent to withdraw
US participation in the Trans-Pacific Partnership (TPP).

An
aggressive stance on trade played a key role in gaining the support of
working class voters in Midwestern manufacturing states, where upset
wins swept him into the White House. What is more, trade is one area in
which Trump, as President, will have the power to act on his own
without action by Congress. As Gary Clyde Hufbauer
of the Peterson Institute has explained, both the US Constitution and
past acts of Congress give the President ample authority to do things
like withdraw from the TPP or NAFTA, label China a currency manipulator,
or impose retaliatory tariffs on any country he sees as a threat to US
economic security.

But how would American workers actually fare
under a protectionist regime, especially older workers, and those with
few skills and little education, who voted for Trump by wide margins? Not well. Here is why a protectionist shock could do more to harm than to help the US job market.

Calling out China as a currency manipulator won’t help

Trump
has repeatedly blamed US trade deficits and job losses on currency
manipulation, especially by China, which he charges with weakening the
yuan to keep its exports artificially cheap. In fact, calling out China
as a currency manipulator will not bring back jobs for the simple reason
that the charge is obsolete. Far from holding down the value of its
currency, China has, for more than two years now, been fighting to keep
the yuan strong. Mexico, another of Trump’s favorite targets for
retaliation, has been doing much the same, although the details of its
policy differ.

When Chinese authorities want to weaken the yuan
(or renminbi), they do so by asking the People’s Bank of China to buy
dollars to add to foreign exchange reserves. The Chinese did that
consistently until early 2014, but since then, as the following chart
shows, China has been selling reserves at a frantic pace in an attempt
to keep the yuan strong. Despite those efforts, fears of a trade war
have pushed the yuan sharply lower since election day.

Mexican
policy works a little differently. Instead of directly manipulating
exchange rates by buying and selling reserves, the Mexican central bank,
like the US Federal Reserve, focuses its monetary policy on interest
rates. Interest rates, in turn, affect exchange rates indirectly, since
raising rates encourages capital to flow toward Mexico and boosts the
value of the peso. Twice this year, once before and once after the
election, the Bank of Mexico has raised its rates, but as in the case of
China, its efforts have not been fully successful. The peso has fallen
to record lows anyway.

There is a deep irony here. Contrary to
Trump’s claim that our trading partners manipulate their currencies to
undercut American workers, China and Mexico have been fighting to keep
their currencies strong. Yet Trump’s protectionist bluster has spooked
the markets so badly that the yuan and the peso have depreciated anyway.
On the currency front, the more Trump rants, the harder he makes it for
his American working class supporters to hang onto their jobs.

The jobs that come back won’t be the right ones

If
Trump, were to impose tariffs of 35 percent, 45 percent, or more on
Mexican and Chinese goods, as he has threatened, there is no doubt that
some manufacturing operations would return to the United States. However, that is not the same as saying that manufacturing jobs would return.

The
problem is that while international trade has contributed to a decline
in manufacturing jobs in the United States, it has not been the only or
the largest contributor. Total manufacturing employment in the US peaked
in the 1970s, when China was still suffering under the Cultural
Revolution and long before NAFTA was even conceived. However, the share
of manufacturing in GDP has barely changed over the last half century. Most of the decline in manufacturing employment is due to increased labor productivity, not a decline in manufacturing output.

Those trends are not unique to the United States. As Harvard economist Dani Rodrik
has shown, manufacturing employment, as a share of all jobs, reached
its peak in Mexico in 1980, in Brazil in 1986, in Korea in 1989, and in
India in 2002. Reliable data are harder to come by for China, but the
most recent available numbers suggest that manufacturing jobs in that
country are approaching their peak now, or perhaps even a year or two
past it. To put it simply, it is not so much that workers at Ford are
losing jobs to workers in China and Mexico as it is that workers in all
of these countries are losing their jobs to robots.

What is more,
automation is not affecting all manufacturing jobs equally. Rodrik shows
that low skill manufacturing jobs have been most strongly affected, not
just in the US but everywhere you look. The next chart, based on data
from a broad sample of forty countries, shows that in just 13 years,
from 1996 to 2009, low-skill manufacturing jobs as a percentage of all
low-skill jobs in these economies fell by 4 percent. Meanwhile, even
though total manufacturing employment was falling, high-skill
manufacturing jobs actually increased as a share of all high-skill jobs.

By
implication, even if harshly protectionist policies brought
manufacturing operations back to the United States, our newly
Made-in-America T-shirts and Christmas ornaments would be fabricated and
packaged largely by machines. The technicians who installed and
operated those machines would have lots of new jobs, but the low-skill
workers who voted en masse for Trump would remain at the cash registers in the Big Box stores where the products were sold—if they had jobs at all.

Falling labor mobility makes the US economy more vulnerable to shocks

Economists
have long acknowledged that free trade produces losers as well as
winners. To be sure, the Pollyannas among them have assured us that the
losses from trade shocks are transitory. Trade-displaced workers, they
have said, get back on their feet as they move to new jobs in export
industries. Meanwhile, as cheap goods flood the stores, those workers,
like everyone else, enjoy a lower cost of living.

Recent research
suggests, however, that the picture is not quite so bright.
Globalization has brought many benefits, to be sure, but the losses have
been more persistent and more concentrated than the optimists expected.
In a widely cited study,
David Autor, David Dorn, and Gordon Hanson examine what the authors
call “the China shock,” and reach a number of pessimistic conclusions:

Most
importantly, they find that the impact of trade shocks is far from
temporary. Job losses and lower wages in hard-hit regions persist for
years. Furthermore, because the effects are geographically concentrated,
labor mobility is not sufficient to ensure that losses by workers are
widely shared across regions and industries. Nor is it true, as some
optimists have promised, that workers displaced by trade shocks quickly
find comparable jobs in export industries.

Moreover, Autor and his
colleagues find that trade shocks disproportionately affect low-wage
workers within affected regions and industries. Those who do find work
often end up in services or other sectors where jobs do not fit their
skills and wages are lower. Others turn to government assistance,
including unemployment benefits, disability benefits and food stamps.

To
make things even worse, evidence from other studies suggests that it
has become harder over time for the U.S. labor market to adjust to trade
shocks. One major reason is decreased labor mobility. Falling rates of interstate migration, as shown in the next chart, are just one indicator. Several factors have contributed to decreased labor mobility.

Disincentives
in the social safety net are one source of reduced mobility. As
mentioned above, Autor's work shows that displaced workers seek
temporary relief from hardship by taking advantage of food stamps,
unemployment benefits, and other programs. Benefits paid under these
programs are reduced or eliminated when the displaced worker finds a new
job. As Those benefit reductions, which (according to the Congressional Budget Office) can claw back take 30, 50, or even 80 cents of each dollar of added income. (For a fuller discussion of this issue, see this earlier post).

Less-than-fully-portable
healthcare can also make it hard for displaced workers to move to where
the jobs are, especially if their coverage comes through the employer
of another family member. The Affordable Care Act has made some
improvements, but, since much healthcare coverage is still
employer-based, and because options vary widely from state to state, it
has not full solved the problem of portability.

The spread of occupational licensing
to a third of all jobs today, up from 5 percent in the 1950s, is
another factor that undermines mobility. The fact that licenses are not
automatically transferable from state to state creates an obvious
problem for any trade-displaced worker in a licensed profession. Even a
displaced worker in a nonlicensed profession may find it hard to move to
a new job if the family depends on income from a spouse who is a
state-licensed math teacher, manicurist, or pest control worker.

The
steady increase in the number of Americans with criminal records has
further reduced labor mobility. Most of the 70 million Americans with
criminal records do eventually find jobs, but if they are displaced from
that job by trade, it can be much harder to find new work.

Protectionism would be the biggest shock of all

The
decreasing flexibility of the labor market matters because a sudden
turn toward protectionism would itself impose a tremendous shock. Today,
after years of painful adjustment to globalization, wrenching moves,
and costly retraining, most workers displaced by the China shock, the
NAFTA shock, and other trade shocks have found new jobs and new homes.
Imposition of new tariff barriers and withdrawal from trade agreements
would make it necessary to go through all of that again, in reverse.

Millions
of American workers in export industries would lose their jobs as
trading partners retaliated, or as those countries simply became too
poor to buy Boeing aircraft for their airlines or US-made MRI machines
for their hospitals. Millions of other Americans who work in finance and
transportation services that support trade would also find their jobs
threatened, as would those who work in sales, marketing, and retailing
of goods the US now imports.

In fact, it is an oversimplification
to say we would have to go through the original trade shocks “in
reverse.” In reality, those shocks are not reversible. Workers displaced
from jobs they once held in manufacturing would not just be able to
move back to jobs in reopened factories in their original home towns.
Even if those factories are still standing, they will never reopen.
Instead, making America self-sufficient in manufactured goods would mean
building a whole new generation of modern, automated factories, in new
locations, offering fewer jobs and requiring different skills than in
the past.

The bottom line

In short, the
dream that protectionism could make America great again in the way many
Trump supporters imagine is an illusion. Yes, at considerable cost, a
sharp turn away from trade might make America more self-sufficient, but
that process, like globalization itself, would create losers as well as
winners. The lower-skilled, less-educated, and older workers who voted
most heavily for Trump would almost certainly be among the losers.

Fortunately,
trade protection apart, there are other elements of the Trump program
that could potentially improve the ability of the economy to adjust to
future shocks, whether they came from trade, technology, or elsewhere.

One example would be to replace the well-intentioned but overly complex Affordable Care Act with something simpler and more portable.
Trump has said he would do that. He has also promised to reduce the
burden of government regulations. A good place to start would be to put
some federal leadership, perhaps linked to financial incentives, behind
sporadic state-level efforts to eliminate unnecessary occupational
licensing and harmonize requirements across states where licensing
remained.

Further, Trump has said he favors leaving marijuana
legalization up to the states. If that means ending criminalization of
marijuana at the federal level, it would be a first step toward reducing
the number of Americans with criminal records and increasing the number with jobs.

Reforming the corporate tax system would also help. Trump’s tax plan
includes a promise to reduce the top rate to no more than 15 percent
while closing loopholes. Both Democrats and orthodox Republicans have
proposed similar reforms in the past, so a skilled negotiator should
find it easy to make a deal across partisan lines. Corporate tax reform
could slow or even reverse corporate flight that Trump has so often
spoken out against.

In short, despite the criticism here of
Trump’s incendiary rhetoric on tariffs and trade pacts, his program
includes many sound policy proposals as well. Let’s hope that as
President, he will prioritize the promises that are the most
constructive rather than those that are the most counterproductive.

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